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Current Affairs

December 31, 2013

Regular readers of my WTWA series know that I occasionally give the Silver Bullet Award. This recognizes writers who take it upon themselves to debunk dangerously misleading financial analysis. Their often thankless work reminds me of the Lone Ranger, whose adventures often upheld the notion that "...that all things change but truth, and that truth alone, lives on forever."

Over the course of the past year, I included a Silver Bullet segment in my weekly post only a dozen times. As 2013 draws to a close, it seems fitting to revisit these highlights. Each is an important story that you might have missed.

April 21: Mike Konczal reveals key Rogoff and Reinhart errors

It is a long-standing position of mine that financial bloggers have a responsibility to put academic findings into a real-world context for our readers. This is precisely what Mike Konczal did when he broke the story about a celebrated academic study on the relationship between debt to GDP ratios and the rate of growth.

The authors, Rogoff and Reinhart, found that "median growth rates for countries with public debt of 90 percent of GDP are roughly one percent lower than otherwise; average ( mean) growth rates are several percent lower." While financial media had a tendency to portray this result as a consensus within the field, Konczal popularized a competing report that cast doubt on Roff and Reinhart's conclusions. Herndon, Ash, and Pollin - the authors of the new report - found a number of errors within the original study's methodology, concluding for themselves that "relationship between public debt and GDP growth varies significantly by time period and country...[therefore] the evidence we review contradicts Reinhart and Rogoff's claim."

As usual, whoever was writing as "Tyler Durden" did not give a link to the alleged David Rosenberg comment, so we do not know if it is accurate. I get frequent questions from readers about ZH analyses and conclusions. The stories usually combine a smidgen of real data with severe distortion. This makes them difficult to refute, especially when the story appeals to the preconceptions of most readers.

The latest installment takes a single month of real income, distorted by anticipated tax changes, multiplies the result by 12 to "annualize" and make it seem bigger, and then go for the scare. Doug exposes this methodically and carefully. Most readers will not want to consider the full refutation – and that is what "Tyler" counts on.

May 11: Joe Taxpayer busts comparison of the S&P in 2012 to the Nasdaq in 1999

Joe explains: " ...the move from 1250 to near 1600 on the S&P is about 28%. In comparison, the Nasdaq move took it from about 1500 to 4500, a 200% increase. You can easily take any move in the market and with a bit of manipulation, create a chart as you see above. The key in this case is the two different scales, the S&P on the left, Nasdaq on the right. Had the charts been produced using the same scale, they’d show no resemblance to each other."

August 4: Bob Dieli sets the record straight on part-time employment

Bob Dieli won the Silver Bullet award over the summer with a timely reminder on the correlation-causation fallacy. His analysis is now publicly available here, and below are my reactions at the time.

There is a deceptive theme about employment, disparaging the quality of the net jobs created. Some of the writers have obvious political motivations or enjoy reputations as leaders of the tin hat movement. What is alarming is that the theme has gained credibility with some mainstream pundits who spend too much time on the wrong websites. Egregiously bad was the John Mauldin article citing Charles Gave's analysis. Not only is this wrong on the part-time employment issue, it blames everything on QE. I tweet infrequently, but I managed a 140 character response to this one:

To Charles Gave and John Mauldin: Blaming QE for the trend toward part-time employment is like blaming the firemen for the fire.#causation

August 17: Dave Altig tackles the link between employment and low paying jobs

A big thanks to Dave Altig for taking on the alleged link between employment and low paying jobs. As I wrote in August:

[Dave's] creative use of charts and data reveals the truth about employment and low-paying jobs. There is a recurring theme that recent job creation has emphasized the worst jobs. Dave started with a recent WSJ story that captured mainstream thinking. I cannot possibly do justice to this post in a few words. There is a fascinating animated gif that shows wage changes by sector over time, so check out the full article.

Meanwhile, the following chart illustrates one of the themes: The changes are part of a long trend, not a post-recession effect.

September 1: Derek Thompson calls attention to a key error in stats on youth residency

At the time, major financial media sources were abuzz with stories of how 1/3 of young adults were forced to live at home due to a tepid economic recovery. Derek Thompson saw past the gloom of doom and pointed out that college dorm rooms counted as "home" for the purposes of the study. Thompson writes:

It comes down to a very sneaky definition of "home." In the Current Population Survey that provides these figures, "college students in dormitories are counted as living in the parental home." Dormitories! This might strike you as absurd -- and it certainly strikes me as questionable -- but it's Labor Day Weekend, and I'm not going to waste it fighting with the folks at CPS, so there it is. Dorms = your parents' place, according to the government.

This is a huge deal for the Millennials-living-at-home figures, because college enrollment increased significantly during the recession -- 39% of 18- to 24-year-olds were enrolled in college in 2012, compared with from 35% in 2007 -- and college enrollees are much more likely to be living at home (er, in dorms) than students who skip college, drop out, or finish early.

...[the cartoon character] defines money in a very peculiar way so that it doesn’t include anything that doesn’t serve as a store of value. According to his definition money is a store of value, medium of exchange, unit of account, portable, durable, divisible and fungible. He then claims that gold fits this definition. But gold doesn’t fit this definition! First off, you can hardly use gold to buy anything in the real economy. Try going into Wal-Mart with a bar of gold. They’ll tell you to piss off. Better yet, try transporting all your gold around with you where ever you go. Gold doesn’t even fit his own definition. In fact, it fails almost completely in money’s most important function – as a medium of exchange.

Of course, most of our dollars don’t serve as a good store of value. In fact, holding paper currency or even bank deposits is a pretty dreadful way to try to maintain your purchasing power. Does that mean bank deposits and paper currency are not money? Of course not.

November 3: Stephen Suttmeier and Barry Ritholtz on margin debt

Stephen Suttmeier and Barry Ritholtz earned their Silver Bullet Award by addressing the idea that current margin debt levels indicate a market top. This had been on my agenda for some time, so I thought it warranted to a more thorough evaluation:

I have looked carefully at the charts and the variation seems largely coincident, with margin levels sometimes leading and sometimes following...

Merrill's Suttmeier includes the margin debt rate of change as an indicator of whether a rising market is peaking or breaking out. Barry notes, "If the rate of change data somehow corresponds to past shifts in secular markets from bears to bulls, this is potentially a very significant factor."

This analysis is much more sophisticated than what you usually see on this topic. I would love to see more research here, but this provides some needed balance. Here is a summary chart of the basic relationship, but I recommend reading the entire post.

November 16: David Merkel and Tom Brakke on the risks investors face on the quest for yield

Big yields (especially tax-free ones) are so alluring and so dangerous. Most investors can't parse the risks and, frankly, many of those purporting to provide guidance aren't going to bother to educate them.

November 23: Dan Greenhaus adds essential context to a chart by Andrew Wilkinson

This Silver Bullet award was likely the most complicated one of the year. For the sake of clarity, I have embedded the relevant segment from my Weighing the Week Ahead post below:

Indeed, we recently devoted an entire conference speech to pushing back on the idea of an equity bubble. How do we know the story remains? The chart below, overlaying the S&P 500 today against equities in the 20s/30s is now starting to make the rounds. Without getting too personal, "chart overlaying" is lazy and this is no less so. But it does remind us that as much as everyone thinks everyone else is "all bulled up," these views still persist and have shown no indication they are going away any time soon.

This was good work, exposing a typical bogus chart, but there was much more to the story.

It turns out that the original source was Andrew Wilkinson of Miller Tabak. He did the work to normalize the data, generating equal percentage changes. The result is a chart that is a fair comparison of the two periods. Business Insider also covered this story, in a nice post by Steven Perlberg and Andy Kiersz. Here is the comparison chart from Wilkinson's original piece:

The entire story illustrates one of the drawbacks of modern social media. People take something out of context and pass it around. The average person sees the message at face value.

This may be our most complicated "Silver Bullet" story, but I found it fascinating. There was a lot of good work. Sadly, my guess is that most recipients of the bogus chart never saw the refutation.

December 28: Paul Krugman and John Lounsbury on whether a debt "trigger point" exists

Most recently, John Lounsbury spent some time during the holidays to look over some old Paul Krugman papers. I explained to readers the imporance of keeping your politics and your investments separate, and John brought the point home with a couple key charts.

I know that many readers just tune out anything from Krugman, but this is poor practice for investors. One of the key stories of the year has been the austerity debate and the flawed work of Rogoff and Reinhart – still continually cited by those who think you are uninformed. A key question is whether there is a debt "trigger point" that causes a decline in economic growth. Once again, I care as an investor, not as a voter – despite the politically charge that has been applied to the issue. So here are the facts in two charts.

The first shows the relationship with Japan as an outlier.

The second shows the members of the EU with a different marker.

See John's post for the full explanation about why it helps to have your own currency.

Conclusion

As always, you can feel free to contact me with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you'll find them here. Have a Happy New Year and a profitable 2014.

I also highly recommend the "Gut Feeling" series from Scott Rothbort, my colleague at the Wall Street All Stars site. Scott does an excellent review of his 2012 predictions.

As to the coming week, there are a few things worth noting.

No one can say much with certainty before the legislative process plays out (although that is not stopping most from offering an opinion).

The outcome that I have long predicted as most likely -- a resolution of the main tax issues and deferral of spending cuts -- is still a live possibility.

I'll update the possibilities in the conclusion, but let us
first hit some highlights from last week.

Background on "Weighing the Week Ahead"

There
are many good lists of upcoming events. One source I
especially like is the weekly post from the WSJ's Market Beat blog.
There is a nice combination of data, speeches, and other events.

In
contrast, I highlight a smaller group of events. My theme is an
expert guess about what we will be watching on TV and reading in
the mainstream media. It is a focus on what I think is important
for my trading and client portfolios.

This is unlike my
other articles at "A Dash" where I develop a focused, logical
argument with supporting data on a single theme. Here I am simply
sharing my conclusions. Sometimes these are topics that I have
already written about, and others are on my agenda. I am putting
the news in context.

Readers often disagree with my
conclusions. Do not be bashful. Join in and comment about what we
should expect in the days ahead. This weekly piece emphasizes my
opinions about what is really important and how to put the news in
context. I have had great success with my approach, but feel free
to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is
"ugly" and on rare occasion something really good.
My working definition of "good" has two
components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.

It is better than expectations.

The Good

The economic news last week was mostly positive. The single most important report was initial jobless claims, which are now hitting a pre-recession low. Here is a good chart from Bespoke:

More reading: Check out The Bonddad Blog for a summary of the year-end strength in the high-frequency indicators.

The Bad

There was some bad news last week, but not very much. The worst news was consumer confidence as measured by the Conference Board. The worst part of the report was future expectations, suggesting the Fiscal Cliff story is at fault.

Doug Short has excellent coverage of this report, placing the most recent news in historical context and comparing the data with the survey from the University of Michigan. Here is one particular chart that really captures the story:

The Ugly

The ugly award for the week goes to those trying to stimulate ratings or page views by scaring their audience about the fiscal cliff. There are real concerns and consequences, so no exaggeration is required!

After the close on Friday, CNBC's Kudlow Report (with Michele Caruso-Cabrera subbing for Larry) began the show with a diatribe about the lack of progress from the meeting of Congressional leaders with the President. As I have frequently noted, this entire approach is incorrect, displaying a lack of knowledge about how the policy-making process works.

And by the way, the same program noted that the longshoreman strike went to the eleventh hour before an extension. The NHL is still out. There is nothing unusual about difficult negotiations going until the last minute and requiring a deadline to achieve a result. There is also nothing unusual about needing an extension of the deadline, as the longshoreman are getting.

Regular readers know that I am long-time viewer of Kudlow, so I am saddened by the continuing efforts to outflank Fox on the right. The former method of inviting great guests and giving them a chance to speak worked well for me.

So why is this "the ugly?" Caruso-Cabrera's opening monologue emphasized that the market hated Obama's announcement of the meeting results and that the futures trading implied a down 300+ opening on Monday.

This interpretation is completely incorrect--- a blunder! CNBC should be ashamed and should make a correction, just as they did when Warren Buffett called them out. I cannot find the video on their website, but I have it on TIVO and I was not the only one to notice.

Here is a brief explanation. Stocks stop trading at 4 PM Eastern and 3 PM Central. Futures trade for another fifteen minutes. If there is breaking news, the future can trade lower (or higher) than the final marks on stocks.

Since the White House meeting story was breaking late in the day (including a lot of poor reporting) the market was selling off into the close. The actual settlement price for futures is a little complicated, but it basically is an average of the high and low price during the last thirty seconds of trading. If there is no trade during that time, it is the last trade in the prior interval. This is all designed to avoid any manipulation of the market, since the settlement prices are the basis for many OTC derivatives.

The "fair value" of the S&P 500 (or the Nasdaq or the Dow) is a simple arbitrage calculation. The owner of the futures contract saves the cost of buying the underlying stocks but loses the dividends from those stocks. Fair value can be a touch higher or lower than the cash price depending on short-term rates and dividends. Apparently, no one at CNBC understands this -- thus the blunder.

Here is a better analysis of the late futures trading -- less than 1% lower. Even that reflects a knee-jerk reaction to complex events. The last trade was a rebound from the settlement price -- up 50 or so in the Dow. My major point? None of this is really meaningful and the messengers do not understand what they are telling you.

Such is the state of investor information. My main concern is for investors reading over the weekend. In the 1987 crash people formed an opinion and called their mutual funds with sell orders. This started the selling process on that fateful day.

Putting out incorrect information has consequences both for the investors who (unwisely) act on it, and also for everyone else.

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the
reported values do not include
last week's market action. The SLFSI
has moved a lot lower, and is now out of the
trigger range of my pre-determined
risk alarm. This is an excellent tool for
managing risk objectively, and it has
suggested the need for more caution. Before
implementing this indicator our team did
extensive research, discovering a "warning
range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool,
since it does not attempt to predict how people will interpret
events. It uses data, mostly from credit markets, to reach an
objective risk assessment. The biggest profits come from
going all-in when risk is high on this indicator, but so do
the biggest losses.

Doug Short has excellent continuing coverage
of the ECRI recession prediction, now well over a year old. Doug updates
all of the official indicators used by the NBER and also has a helpful
list of articles about recession forecasting. His latest verdict is that the ECRI has flunked Recession 101!

RecessionAlert uses a variety of different methods, including the ECRI, in developing a Super Index. They also offer a free sample report. Anyone following them over the last year would have had useful and profitable guidance on the economy.

Georg Vrba explicitly and carefully refutes the ECRI approach. I encourage a thorough reading of Georg's work -- a few minutes well spent.

Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll.
We have a long public record for these
positions. Three weeks ago we switched to a bullish position, and the outlook has become even more positive.
These are one-month forecasts for the poll,
but Felix has a
three-week horizon. Felix's ratings stabilized at a low level and improved significantly over the last few weeks. This week reflects a notable decline.
The penalty box percentage measures our confidence in the forecast.
A high rating means that most ETFs are in the penalty box, so we have
less confidence in the overall ratings. That measure is moving higher, so we are becoming less confident in short-term trading.

[For more on the penalty box see this article.
For more on the system
ratings, you can write to etf at newarc
dot com for our free report package or to
be added to the (free) weekly ETF
email list. You can also write
personally to me with questions or
comments, and I'll do my best to answer.]

The Week Ahead

The holiday-shortened week brings little data and scheduled news.

The "A List" includes the following:

Employment report (F). Normally big, and maybe it still will be.Initial jobless claims (Th). Employment will continue as the focal
point in evaluating the economy, and this is the most responsive
indicator.

The ISM index (W). A good coincident indicator.

The "B" List" does not interest me this week.

The decision on the fiscal cliff issues will be most important. This will interfere with New Year's Eve parties. If there is no decision, we will have continuing speculation about the "bungee jump" over the cliff, where the new Congress can try to save the day by "cutting taxes."

If and when we get past this, there are plenty of Fed speeches to entertain us later in the week.

Final Thought

There are many possible outcomes as I write this on Saturday night. Anything suggested now could seem foolish by New Year's Eve.

Since I have been very accurate so far, I'll venture to speculate a bit more.

Bullish Outcome

The most encouraging result will be a resolution of the tax matters -- anything that affects individual or business planning for 2013. This has been my long-term base prediction. See here for the most recent summary.

This would resolve most of the issues that threaten economic growth. The major tax reform, spending cuts, and debt ceiling would be deferred for 60 or 90 days.

Bearish Outcome

The worst result would be a complete lack of agreement. This would require instant reaction by the new Congress -- the so-called "bungee jump" over the cliff. It would provide a fig leaf for those who would rather vote for tax cuts after allowing the old policies to expire.

My Guess?

As I write this, the insider reports say that there is little progress in the negotiations. Here is what to watch for:

Senators Reid and McConnell may come up with a compromise that have hated provisions for both sides -- tax rate increases for those earning more than $400K, a capital gains rate of 20%, dividend taxes of no more than 20%, a compromise on inheritance taxes at nearly the current exemption and rate.

The agreement must satisfy the most conservative Senate elements to avoid a filibuster and procedural objections.

The House would have to consider the result with little time for amendment. Boehner would be under intense pressure to allow a vote on something with widespread GOP support, despite the Tea Party objections.

If a vote were to be allowed, my guess is that it would pass in the House with strong Democratic support and possibly a majority of Republicans.

The key is that the legislation would have passed muster on Sunday with both GOP and Democratic caucuses in the Senate -- before any voting.

If this does not pass muster in the House, the bare-bones Democratic proposal to extend Bush-era cuts for those earning less than $250K will be the agenda.

President Obama will be on Meet the Press Sunday morning. The market did not give him sufficient credit on Friday. Instead of profering his own "solution" he held back his own "Plan B" while giving the key parties one last chance to come together.

If Boehner will not allow a vote on either of these proposals, the GOP will hear from doctors and middle-income folks who will be retroactively subjected to the AMT, as well as businesses who want some certainty.

Summary

There are many ways that an agreement can be derailed. It has all been coming down to this for many, many months. All of the public statements have been posturing.

December 27, 2012

Here is an all-time first: Market rallies on news that Congress will be in session!

That was today's story. The market gyrations lacked a grounding in reality. Joe Weisenthal charts the day, with my comments to follow.

Here are a number of rhetorical questions:

After weeks of public posturing on both sides, would we really expect Reid, McConnell or Boehner to make a conciliatory speech from the floor?

Did we think that Obama would come back early from vacation without even a rumor of a new plan?

With 100 Senators and 435 Congressmen, do we think that they will all remain silent as negotiations proceed?

Perhaps we should expect that many will be claiming a few minutes of fame without any new information at all!

If you were making trades by accepting this "information" you were on the wrong side today!

The Reality

While the market is following the public news sources, including anyone who will go on TV, none of this information is very helpful.

There have been continuing back-channel discussions at the staff level. There is also escalating pressure, especially on Republicans, to reach some kind of deal. The doctors, those affected by the AMT, and the business executives stymied by uncertainty are mostly from the GOP.

If they had a chance to vote on a compromise proposal, many GOP legislators would support a compromise. The compromise would be close to the most recent Obama/Boehner discussion, with perhaps a little more concession from the President on spending. While there is support for such a plan, there is a key problem of who goes first, both in terms of party and also which House. Revenue bills are supposed to originate in the House. This partly explains why the Senate-passed bill on the Obama plan has never formally gone to the House.

This is only going to work if the Senate finds a compromise, without a filibuster, that Boehner is also willing to accept for a House vote. There is still some possibility of this, and we may well know the verdict tomorrow. The path to a compromise would start with the Senate considering such a proposal. The House would take it up on Sunday.

The other alternative is the "bungee jump." I have noted that legislators are creative when it comes to deadlines. They might extend their deadline by going "over the cliff" while sending a message that there will be an early vote by the new Congress.

The Nature of Compromise

I enjoyed reading the description of compromise from Alan Grayson, a Democratic Congressman-elect from Florida. To appreciate the key point, don't think about his particular perspective, but instead focus on the process he is describing:

"Here are what I modestly and humbly refer to as "Grayson's Laws of Legislating":

1) Vote for what you're in favor of.

2) Vote for what you can live with, if you must do that to get what you need.

What we've been seeing in the House of Representatives lately has
been a series of massive and pervasive violations of Grayson's Laws of
Legislating. Instead of "I'll vote for X because it's right," or "You
don't like X and I don't like Y, but I'll vote for X and Y if you vote
for X and Y," it's "If I don't get Z, I ain't votin' on nothin'." And
that's the problem."

He provides a colorful example of where nearly everyone in Congress agrees on most of the fiscal cliff issues. On the remaining 10% he provides a colorful example of trading help for the unemployed for more defense spending. It is a good description of how Congress has worked for decades.

The key question is whether we can see this sort of horse trading within the next few days.

Trading and Investing

The volatility is a natural opportunity for traders. You need only to fade the statements of whatever politician spoke most recently.

Investors should look a month or so ahead. If you are willing to conclude that there will eventually be a solution, you can go shopping for bargains whenever there is apparent bad news.

These were today's opportunities, and we might well see the same thing tomorrow.

December 15, 2012

After several weeks of noise -- from both data and politicians -- it may finally be time for some clarity. I have predicted this with my theme for the last few weeks, and we are starting to see the results:

The Fed -- aggressive policy, clearly stated, but still not well understood (more below).

US economic data -- the Sandy weakness is proving temporary.

China -- signs of an end to the slow slide, and not a hard landing.

Housing -- several signs of a bottom and some for a real bounce.

Europe -- none of the really bad things happening, but further delays in a final solution.

The fiscal cliff -- the biggest unresolved issue.

The problem with this list is that the fiscal cliff issues are so important that we really need some answers -- and soon! As I wrote in my first installment of "Cliff Notes," there has been little real information so far. I refuse to join in the daily discussion of non-events, but it will now start to get interesting. I will write more installments of Cliff Notes as circumstances warrant.

For the purpose of our weekly review, I will simplify this in two dimensions -- content and timing.

Content

Many issues have been lumped together as part of the Fiscal Cliff discussion, just as last year's debt ceiling debate turned a routine matter into a threat to US credibility. I am putting all of the issues into two categories

There are also issues concerning the renewal of long-term unemployment benefits and whether the debt ceiling will be a regular pinata for Congress. These might be taken up in either group. The first group is most important to the economy since it would have an immediate effect.

Timing

I have predicted that this issue would go to the last possible moment. How is that defined? I am reminded of my college days when I lived in Indiana. The State legislature was Constitutionally required to pass a budget by a certain date. Each year the legislative session ended, with no further options possible. They regularly missed the deadline, although they were always close. The Sergeant-at-Arms would go to the back of the chamber and stop the grandfather clock, halting it a little before midnight. Time stood still! Eventually the budget was passed, meeting the official deadline.

There are four possible deadlines to consider:

This week, allowing a Christmas break.

Before the end of the year.

In the first few days of the new Congressional session.

Weeks or months later.

The timing track for tax matters is more urgent than for deficit matters.

I'll offer my own take on what to expect on the fiscal cliff in the conclusion. Let us first do our regular
review of last week's
news and data.

Background on "Weighing the Week Ahead"

There
are many good lists of upcoming events. One source I
especially like is the weekly post from the WSJ's Market Beat blog.
There is a nice combination of data, speeches, and other events.

In
contrast, I highlight a smaller group of events. My theme is an
expert guess about what we will be watching on TV and reading in
the mainstream media. It is a focus on what I think is important
for my trading and client portfolios.

This is unlike my
other articles at "A Dash" where I develop a focused, logical
argument with supporting data on a single theme. Here I am simply
sharing my conclusions. Sometimes these are topics that I have
already written about, and others are on my agenda. I am putting
the news in context.

Readers often disagree with my
conclusions. Do not be bashful. Join in and comment about what we
should expect in the days ahead. This weekly piece emphasizes my
opinions about what is really important and how to put the news in
context. I have had great success with my approach, but feel free
to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is
"ugly" and on rare occasion something really good.
My working definition of "good" has two
components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.

It is better than expectations.

The Good

The economic news last week was mostly good.

Initial jobless claims dropped to 343K range. This was not quite as good as forecast by New Deal Democrat from The Bonddad Blog, whom we cited last week. He caught a mistake in his initial work and posted a very honorable correction. (It would be a better world if more bloggers caught their own mistakes and corrected them). As I noted last week, this is a very noisy series with many adjustments. It is great information, and I watch it closely.

The world will not be ending on Friday. The Mayans predicted 12/21/12 as the day. NASA says "no." From The Telegraph: In America Ron Hubbard, a manufacturer of hi-tech underground survival
shelters, has seen his business explode. "We've gone from one a month to one a day," he said. "I don't
have an opinion on the Mayan calendar but, when astrophysicists come to me,
buy my shelters and tell me to be prepared for solar flares, radiation, EMPs
(electromagnetic pulses) ... I'm going underground on the 19th and coming
out on the 23rd. It's just in case anybody's right."

The Fed gets more aggressive, with pedal to the metal for a long time. Despite the ho-hum market reaction, this is market-friendly news. It is going to require more than I can do in the weekly summary, so here are two hints:

This will increase the money supply, monitored weekly at The Bonddad Blog. Their weekly indicators are mostly positive, but those who are monetarists should be encouraged by the resumption of growth in real M2, now 5.6% year-over-year. This works with a lag on the economy, so we have not seen it yet. Read the full story to see the other high frequency indicators.

Josh Brown jumps fast on the instant analysis of the punditry. Below is his chart, but you need to read the entire post (The Dumbest Thing You'll Hear...) to understand the message.

Retail sales rebounded to a gain of 0.3%, a bit short of expectations.

Wholesale inventories increased 0.6%, a bit more than expectations. Inventories are a "fudge factor" for everyone. Increased inventory is great if it augurs a perceived future need. Inventory is not so good if unplanned.

Q4 earnings growth is still positive, but declining each week (via Bespoke).

The small business optimism index plummets. This was planned as my highlight for the worst news of the week. Here (via Macroblog) is the key chart:

When you read the entire article, you understand that the story is mixed. The "young firms" are actually optimistic. A loyal reader also pointed me to this story, suggesting that the survey results might reflect partisanship more than business plans.

Regular readers know by now that I am trying to find evidence that will help us all in making the right news. I try to evaluate each piece of news. Small business is important for job growth. It is an interesting question. David Beckworth looks for the answer, leaning to the absence of demand rather than regulation, based mostly on this chart:

This is a great article, but you need to see the other charts to get a full understanding.

The Ugly

All of the other nominees for "ugly" were pushed aside by what happened to our kids in Connecticut. We parents understand instantly, but we are not alone. Events like this always focus attention on what to do. It is too soon to think about that.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up
an unpopular or thankless cause, doing the real work to demonstrate
the facts. Think of The Lone Ranger. (I was uncomfortable in even mentioning a bullet this week, but that is going too far. The Lone Ranger and his trappings are symbols of a better time and place -- one that we do not need to lose).

This week's award goes to Tom Brakke. He highlights a problem that I see every week. Someone sends me a chart which has been manipulated to fit a specific scale and time period. It looks compelling and powerful. It is dangerous. Here is Tom's candidate of the week, two ways of looking at Apple.

The full article is recommended, but here is the key quote:

"I have written before about the ease with which the producers of
charts (including me) can deceive, even if not trying to do so. Some of
the most common ways include picking a starting point for a chart that
maximizes a particular point of view, using price instead of total
return for longer periods, and putting lines together on a chart without
comparing them on a percentage basis. Today’s topic is an example of
the latter.

In a given day, you probably see lots of charts with multiple axes.
Most all of them give you a distorted view of the world. You might get
an idea that something is going up when something else is going up — and
down when it is going down. That can be of interest, but multiple-axes
charts, which are popular with investment professionals and bloggers,
give false indications."

This is very strong work, mostly because the misleading techniques are so common. Whenever you see a chart like this you should be asking what it looks like in different time frames and scales.

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the
reported values do not include
last week's market action. The SLFSI
has moved a lot lower, and is now out of the
trigger range of my pre-determined
risk alarm. This is an excellent tool for
managing risk objectively, and it has
suggested the need for more caution. Before
implementing this indicator our team did
extensive research, discovering a "warning
range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool,
since it does not attempt to predict how people will interpret
events. It uses data, mostly from credit markets, to reach an
objective risk assessment. The biggest profits come from
going all-in when risk is high on this indicator, but so do
the biggest losses.

Despite the recent media blitz from the ECRI, there is no evidence of an imminent recession concern.

Joining the discussion this week is University of Oregon economist and veteran Fed-watcher Tim Duy. Prof. Duy takes up all of the indicators and does a slam-dunk refutation of the ECRI.

"I think that even a cursory glance of all the data the NBER cites as
elements in recession dating, even ignoring the important issue of first
identifying broad-based indicators, would lead one to be very skeptical
about a July recession call on the basis of "eyeball econometrics"
alone."

Doug Short has excellent continuing coverage
of the ECRI recession prediction, now well over a year old. Doug updates
all of the official indicators used by the NBER and also has a helpful
list of articles about recession forecasting. He remains open-minded about
the upcoming evidence. In the latest article, ECRI Weekly Update: Walking the Recession Plank he notes that the ECRI seems to have gone too far, "ECRI, however, has "walked the plank" with the company's recession call.
And and at this point there's no "Peter Pan" recession to save them
from a sea of crocodiles."

For the current time period to be viewed as the start of a recession,
we would need to have a significant decline in the economy. Then the
NBER goes back and dates the start of the recession at the last peak.
As yet we have only small declines, and only in some indicators. None of the best methods I follow shows anything like this.

RecessionAlert uses a variety of different methods, including the ECRI, in developing a Super Index. They also offer a free sample report. Anyone following them over the last year would have had useful and profitable guidance on the economy. Dwaine Van Vuuren notes
that the effects of Sandy have pushed industrial production into
recession territory, sending the current chance of a recession over 11%
according to one of his indicators. His latest article emphasizes his short-term indicators. He is not identifying a recession in any of the various covered time frames.

Georg Vrba explicitly and carefully refutes the ECRI approach. I encourage a thorough reading of Georg's work -- a few minutes well spent.

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll.
We have a long public record for these
positions. Two weeks ago we switched to a bullish position, and the outlook has become even more positive.
These are one-month forecasts for the poll,
but Felix has a
three-week horizon. Felix's ratings stabilized at a low level and improved significantly over the last few weeks.
The penalty box percentage measures our confidence in the forecast.
A high rating means that most ETFs are in the penalty box, so we have
less confidence in the overall ratings. That measure has recently moved lower, so we are becoming more aggressive.

[For more on the penalty box see this article.
For more on the system
ratings, you can write to etf at newarc
dot com for our free report package or to
be added to the (free) weekly ETF
email list. You can also write
personally to me with questions or
comments, and I'll do my best to answer.]

The Week Ahead

This week brings a lot of economic data, but not the most important reports.

The "A List" includes the following:

Initial jobless claims (Th). Employment will continue as the focal
point in evaluating the economy, and this is the most responsive
indicator. We will look for confirmation that the Sandy effects are over and seasonal adjustments have been reasonable.

Building Permits (W). This is the best leading indicator on housing.

Personal income and spending (F). I am promoting this to "A" status because of the bogus claims that a recession started in July. This is a factor to monitor.

The "B" List" includes these entries:

Housing starts (W). Lags permits, but still important.

Durable goods (F). A good post-Sandy read.

Michigan confidence (F). The preliminary reading was really bad.

We get the various regional Fed surveys which mean little for me. They are not important unless deviating dramatically from expectations. I also do not care about the final GDP revisions for a quarter in the rear-view mirror.

There will also be assorted Fed speeches, including one by Fisher (a leading hawk).

And most importantly -- Congress's decision on whether they want to take vacation for a week.

Trading Time Frame

Felix has moved to a more bullish posture, now fully reflected in trading accounts. It has
been a close call for several weeks. Felix
has done very well this year, becoming
more aggressive in a timely fashion, near the start of the
summer rally, and getting out a couple of months ago. Since we only
require three buyable sectors, the
trading accounts look for the "bull market somewhere" even when the
overall picture is neutral. The ratings have moved much higher in the
last two weeks. We noted last week that we expected more buying, and that was what happened.

Investor Time Frame

Each week I think about the market from the perspective of different
participants. The right move often depends upon your time frame and
risk tolerance.

This week I want to highlight Cullen Roche's article, The Bull Market in Fear. He captures the key point nicely in this comment:

"One thing I’ve really battled with in this industry (and in life) over
the years is overcoming emotions. In particular, overcoming fear. If
you have a portfolio you’re probably worried about something (to some
degree). It’s natural. You’ve accumulated all this savings and you’re
worried it might just disappear on a computer screen because of a few
bad decisions."

This really captures the problem facing so many. Cullen goes on to illustrate the high levels of current fear, loosely correlated with past results. Even that has broken down.

Buying in times of fear is easy to say, but so difficult to implement. Almost everyone I talk with wants to out-guess the market. The problem? Value is more readily determined than price!

Individual investors too frequently try to imitate traders, guessing
whether to be "all in" or "all out." This usually leads to mistakes in
market timing. There are plenty of stocks at attractive values right now. Here is what to think about:

Risk. If you are like the average
investor you have it all wrong. You have been piling into bonds, gold,
and dividend funds. All of these categories are now over-valued, the
result of this stampede. Some of the risk is showing up right now, and you will see more in the next few weeks.

A portfolio anchor. You need stability.
If you are trying to do it with bond funds, you need to understand the
risks. I prefer owning specific bonds.

Stretching yield. My approach is to find
some reasonable dividend stocks and sell near-term calls against the
positions. If you did this skillfully, you could hit double-digit
annual returns with significantly less risk than simply owning dividend
stocks. The range-bound market of the last few weeks has been ideal for this approach.

A little octane. Many investors do not
think carefully about asset allocation. There is always volatility, so
the key is to "right-size" your position. Instead of trying to time the
market, try to be a player in the right sectors, the right stocks, and
the right size. There are plenty of stocks selling cheaply in terms of their historic P/E multiples.

We have collected some of our recent recommendations in a new investor resource page
-- a starting point for the long-term investor. (Comments and
suggestions welcome. I am trying to be helpful and I love feedback).

Final Thoughts on the Cliff

After weeks of no movement, this might now become a fast-breaking story. I'll do more Cliff Notes summaries as indicated.

So far the story has developed as I expected. Some are changing their odds since nothing has happened. This is fine for those following all of the commentary, but silly if you did not expect any action in the first place!

There has not been much polling of members or advance work --- "whipping" in Congressional parlance. This means little since positions are pretty well known on these issues.

My forecast calls for a resolution of the tax issues before any real economic impact occurs. Republican constituents are most dramatically affected by the AMT and the doc fix. Every poll shows that the GOP will be held accountable. Over 80% of Congressional insiders expect higher taxes on the rich in 2013. It is only a matter of when and how the tax policy will be changed. The publicized sticking point of rates for those with incomes over $250,000 is subject to compromise on the level of income, the exact rate, and adding some limits on deductions. Both sides can claim victory in a compromise.

If the GOP can bargain this for an attractive commitment on spending cuts, we could see something major before Friday. This would not include the "details" that everyone is foolishly discussing. Any agreement will involve guidelines with various Congressional committees to work out the implementation. For those who never took a class about Congress, think of it this way. Management is making some kind of across-the-board spending cut and looking to departments for specific proposals. This is a rough approximation for Congress. It could be stated more strongly since in this case the departments consist of various fiefdoms, all jealously protecting long-held power.

If there is nothing before Friday, we will see Congress in session for a final week of the year. No one wants this. The GOP might even vote "present" in the House to get the tax matters passed.

If the GOP cannot get an attractive deal on the deficit issues, those will be taken up next year with the debt ceiling as the key leverage point.

Investing Implication

Since opinion is widely divided on the fiscal cliff issues, the market should move significantly when we know the outcome. Much will depend on whether a two-part agreement (tax matters now, deficit matters soon) is effectively communicated.

December 12, 2012

Anyone who made it through college remembers "Cliff Notes." As a professor, one of my jobs was to identify students who had read the real work. Who were the imposters?

Now I am on the dark side!

Investors can join me with our Fiscal Cliff Notes. There are so many pretenders, and so little real information.

I have repeatedly warned that the entire discussion is a costly distraction for most investors. Here are the leading characters in the noise game:

The TV Anchors. Sports fans see this constantly. If you are a sportscaster or "color man" you need to keep talking, no matter what is happening. It is a demanding job, leading to a lot of stupid commentary. One of my favorite sports websites is Awful Announcing, where viewers and readers send in their favorite nominations for the blooper of the week. With the massive and excessive coverage of the Fiscal Cliff, it is easy to find the blooper of the hour. (Examples below).

The Pseudo-Experts. Someone who knows absolutely nothing about what is happening makes a statement. If the prediction is dramatic, it gets attention.

The Former Star player. Someone who used to have power, and wants to maintain the image.

The Wannabee. Often someone without any special knowledge or credentials who wants to seem important.

Bad Commentary

Here are some typical examples of poor commentary. I could give (multiple) citations for each, but that is not the point. If you are a journalist or TV anchor, you have a need for content. Standards decline. Readers are invited to offer more in the comments.

Breathlessly reporting every public statement. This is silly. The real negotiations are not happening in public and the statements are not really news.

Calling the participants "kindergartners" (or worse). This sort of opinionated commentary simply shows a complete lack of understanding of the process. It has become a staple at CNBC, where they are on 24/7 cliff watch. No doubt they will claim credit when it is all over.

Most of the public affairs news shows. Normally the Sunday morning shows are helpful. I record and watch several of them every week. This week we got to see a posturing Newt Gingrich, who made dramatic statements. It was obvious that he was not in touch with what was really happening. The group on ABC included a lecture from Paul Krugman and a responding attack on Krugman's motives from George Will. There was a disappointing lack of substance, mostly because the panel had no real information.

The claim that the market expects a resolution, and has priced it in. With more than half of the public expecting us to go over the cliff, a parade of TV pundits saying the same thing, and the anchors themselves emphasizing this conclusion -- it should be obvious. The issue is in doubt. Whenever this is the case, the market will move one way or the other on the outcome.

The message should be clear: You cannot infer progress, lack of progress, or substance from any of these public statements. What a delight! You can ignore the news and just read the Cliff notes.

Real Information

If you want real information about progress, you need to look at unsourced reports from behind the scenes. These paint a very different picture:

There is actual movement toward a compromise. On the key tax issue, President Obama will relax the rate on the rich by a bit and the GOP will allow some rate increase on high-income taxpayers. The key threshold might move from $250,000 to $500,000.

There will be a solution on the tax issues before year's end. There is tremendous pressure for this on Republicans. No one wants an ambiguous tax code going into the new year, and the main impacts are on GOP constituents.

Participants are trying for a pre-Christmas solution, but there are no guarantees. It might drift for another week.

Explanations

Any fair-minded people who use their business experience and general intelligence can understand the dynamics of the political process, even if they did not take my course in Poli Sci 101. (One of my best teaching experiences was the standing "O" I got at the end of this class in my first semester. It was a real inspiration for a young new Asst. Prof).

Deadlines. Going down to the wire is typical in business. It happens in labor negotiations, corporate buyouts, and new product introductions. It is not the stuff of kindergarten, but rather what happens in the real world.

Significance. These decisions will set the national course for many years to come. They will be difficult to change. It is important to get it right.

Publicity. While the election is over, public support is still relevant to negotiating at the margins. This is reality, and it occurs in labor/management issues as well.

Opportunity. The most popular government programs cut taxes or increase benefits. The most difficult decisions do the opposite. A lame-duck session of Congress is as far removed from politics as we can get. There are retiring members and those with safe seats. There is no better opportunity for making big changes and grand bargains.

Conclusion

My objective is to help investors understand what is going on without the need to absorb and interpret the avalanche of information. Most of it can safely be ignored, but I'll follow up when there is relevant news.

Here is a final tip for traders: If you see a news flash about a joint announcement (Obama and a GOP rep) that is bullish. You will need to be watching and to buy quickly.

When should you sell? Perhaps as the participants go to the podium. Maybe sooner!

This year's Fiscal Cliff resolution will not be celebrated by all. More in the next "Fiscal Cliff Notes."

September 11, 2012

Moody's warns that the US credit rating could go down a notch (joining the S&P downgrade from last year) if the US fails to take appropriate medium-term action. They write as follows (via Politico):

“If those negotiations lead to specific policies that produce a
stabilization and then downward trend in the ratio of federal debt to
GDP over the medium term, the rating will likely be affirmed and the
outlook returned to stable,” Moody’s said in a statement. “If those
negotiations fail to produce such policies, however, Moody’s would
expect to lower the rating, probably to Aa1.”

In many ways this is not very helpful. One of the key disputes over budget policy is what will do most to help in various time frames. Some want immediate austerity while others prefer short-term growth to assist a medium term solution. Moody's provides a warning to "get busy" but no one knows how they will evaluate various alternatives.

And who elected them, anyway? It is not as if the ratings agencies have a stellar record on such matters.

With this background in mind, there is a pretty easy, one-word solution to the Fiscal Cliff. Let us start with one of the helpful interactive tools from The New York Times.

The page shows the count of words spoken by each party at the conventions. These simple quantitative measure are often deceptive, but the tool provides key speeches and also something quite clever:

You can insert your own word and discover the count!

I invite readers to try their own words and share the results with us, but you have a tall order if you want to match my suggested word: Compromise.

The mentions were 2-1, and I mean actual count, not a ratio. The notion of progress through compromise is missing in action right now.

August 25, 2012

Since the decision for QE II is linked to Fed Chair Bernanke's 2010 speech to the annual Economic Symposium at Jackson Hole, some expect a similar outcome this time. There is obvious confusion.

Stocks rallied as the Fed minutes seemed to show a greater receptiveness for more QE. Stocks sold off when St. Louis Fed President, a non-voting member whose hawkish views are well-known, said that the minutes were "stale" and that data had improved. Stocks then rallied a bit when Chicago Fed President Evans basically said the opposite. Finally, there was a significant reversal on Friday when WSJ reporter Jon Hilsenrath released a letter from Bernanke to Congressman Darrell Issa (R, Cal.), responding to some questions he had posed by mail. The answers contained nothing new, but market participants seized upon the date of the letter! The idea is that this is the most recent information.

Here's more evidence of confusion, dedicated to those who are always opining about the "message of the market."

Headline in LA Times: Price of gold surges on Fed stimulus hopes; is it
headed for $2,000?

Two stories -- published within minutes of each other. For the flexible pundit, it is easy to derive whatever message you want!

Figuring out what the market really expects is a big challenge this week.
I'll offer some of my own expectations in the conclusion, but first let us do our regular review of last week's news.

Background on "Weighing the Week Ahead"

There
are many good sources for a list of upcoming events. With
foreign markets setting the tone for US trading on many days, I
especially like the comprehensive calendar from Forexpros. There is also helpful descriptive and historical information on each item.

In
contrast, I highlight a smaller group of events. My theme is an
expert guess about what we will be watching on TV and reading in
the mainstream media. It is a focus on what I think is important
for my trading and client portfolios.

This is unlike my
other articles at "A Dash" where I develop a focused, logical
argument with supporting data on a single theme. Here I am simply
sharing my conclusions. Sometimes these are topics that I have
already written about, and others are on my agenda. I am putting
the news in context.

Readers often disagree with my
conclusions. Do not be bashful. Join in and comment about what we
should expect in the days ahead. This weekly piece emphasizes my
opinions about what is really important and how to put the news in
context. I have had great success with my approach, but feel free
to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is
"ugly" and on rare occasion something really good.
My working definition of "good" has two
components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.

It is better than expectations.

The Good

There was quite a bit of economic data last week, and it had a generally positive tone.

Taxpayers cashing in on toxic assets. While we are still toting up the net results, some of the bailout decisions have paid off on the specific investments, in addition to the possible benefit for the overall economy. Here is a nice article on the subject by Todd Sullivan (always worth reading).

Durable goods set a record high. Some definitely embraced the bright side. Here is Mark Perry's chart (but also see below under 'The Bad").

Auto sales are solid. In support of the full durable goods metric, Mark Perry also cites the authoritative JD Power survey, suggesting that car sales will reach a 4 1/2 year high. This is clearly helping employment and GDP, so it seems relevant.

Individual investors are more bullish in the American Association of Individual Investors Survey. This is a contrarian indicator, of course, suggesting that those in the survey are mistaken. Here is the helpful chart from Bespoke. Because of the honest depiction of data, you can judge for yourself whether the relationship is strong and enduring.

Chinese growth is overstated and falling. Here at "A Dash" I have frequently mentioned this concern. There is additional evidence (via The Big Picture) that official data exaggerates the story in China. Meanwhile, the flash PMI from HSBC showed contraction in the headline number and also specific categories. It is important to monitor developments in China.

Core durable goods are weak, especially in real terms. Doug Short does a series of adjustments for population, inflation, and non-transportation expenditures. His take is much more discouraging than Mark Perry's (above). Steven Hansen claims the middle ground. Here is Doug's summary chart, but it is important to read the entire article and see the complete series of charts if you want to understand the argument.

Bearish indicators -- both short and long term -from Dr. Ed Yardeni. Here is the chart for his three-variable fundamental method.

His conclusion is as follows:

"On
balance, I think that stock prices may move sideways between now and
the November elections. It’s certainly hard to characterize the rally
since June 1 as a “Romney Rally” given that the presidential race
remains in a dead heat. A few pundits have suggested that it’s actually
been an “Obama Rally,” figuring that the market favors the devil we all
know rather than the one we don’t."

The Ugly

The fiscal cliff -- as explained by the CBO. The nonpartisan Congressional source sees an economic contraction of 0.5% if Congress fails to act on the looming changes to current law.

James Hamilton has A Dream, and it is a good one! He accurately notes that the problem lies with a system of government where we reward pandering to specific interests. Here is his very sensible assessment:

"Let me begin by making clear my personal position up front. I think
America faces a serious long-term fiscal challenge. Not one that needs
to be addressed in 2013-- trying to fix this all at once would be highly counterproductive.
But I believe that the American political system is badly broken. The
voting public expects to get something for nothing, and the two parties
compete to promise to give them exactly that. I'm persuaded that both
tax increases and drastic entitlement reform will eventually be
necessary. I would like to see debate and even a consensus reached today
on exactly how we plan to implement both measures over time."

If only we could see such wisdom. Professor Hamilton suggests that either or both candidates might benefit from demonstrating the ability to compromise. We'll see the first act this week in Tampa.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up
an unpopular or thankless cause, doing the real work to demonstrate
the facts. Think of The Lone Ranger.

He had some fun by "talking trash" in the interviews. The chart aligns the two series based upon the most recent and most dramatic decline in 2009. It is pretty rough before that. The eyes can deceive.

But NDD delves more deeply. He also has fun by "trashing a garbage indicator" and invoking GIGO. He notes that the data is based upon quarterly results, but McDonough rushed to print and the talk show circuit with only part of a quarter.

In fact, the data from last year -- not this year -- seems to have been distorted by some abnormal results in the first part of the quarter.

We will not know the final verdict until the end of the quarter, but that is not the point. This is an error in data analysis and a premature announcement. I wonder if Bloomberg or NPR will follow up, as they should. Why not interview NDD?

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the
reported values do not include
last week's market action. The SLFSI
has moved a lot lower, and is now out of the
trigger range of my pre-determined
risk alarm. This is an excellent tool for
managing risk objectively, and it has
suggested the need for more caution. Before
implementing this indicator our team did
extensive research, discovering a "warning
range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool,
since it does not attempt to predict how people will interpret
events. It uses data, mostly from credit markets, to reach an
objective risk assessment. The biggest profits come from
going all-in when risk is high on this indicator, but so do
the biggest losses.

Bob and I recently did some videos explaining the recession
history. I am working on a post that will show how to use this method.
As I have written for many months, there is no imminent recession
concern. I showed the significance of this last week by explaining the relationship to the business cycle.

The evidence against the ECRI recession forecast continues to mount.
It is disappointing that those with the best forecasting records get
so much less media attention. The idea that a recession has already
started is losing credibility with most observers. I urge readers to
check out the list of excellent updates from prior posts.

Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll.
We have a long public record for these
positions. This week we continued as bullish. We have been
bullish since June 23rd, with a one-week move to neutral a few weeks
ago. These are one-month forecasts for the poll, but Felix has a
three-week horizon. The ratings are higher, and the confidence is
improving.

[For more on the penalty box see this article.
For more on the system
ratings, you can write to etf at newarc
dot com for our free report package or to
be added to the (free) weekly ETF
email list. You can also write
personally to me with questions or
comments, and I'll do my best to answer.]

The Week Ahead

This is a big week for economic data.

On my A List are the following:

Initial claims (Th) which continue to provide the most up-to-date read on jobs and the economy

Chicago PMI (F) which is important as a pre-weekend clue about the national ISM report

Personal income and spending (Th). July data, but interesting to confirm retail sales

Q2 GDP revisions. Backward looking but still important given the modest growth levels.

The GOP convention will grab some headlines. It will be interesting, but I do not see an immediate market angle.

Most important of all will be the Jackson Hole symposium, with Bernanke's morning speech on Friday and Draghi scheduled on Saturday.

Trading Time Frame

Our trading positions continued in fully invested mode last week.
Felix became more aggressive in a timely fashion, near the start of the summer rally. Since we only require three buyable sectors, the
trading accounts look for the "bull market somewhere" even when the
overall picture is neutral. As the tape has improved, the ratings from
Felix have gotten stronger.

Felix does not try to call tops and bottoms, but keeps us on the right side of major moves. We had one "neutral" forecast about a month ago, but things never got weak enough to reduce positions.

Investor Time Frame

More sources are joining us in warning about chasing yield.
Jacqueline Doherty does a great job on this front in the current issue
of Barron's, The Danger in Dividend Stocks.
She looks at valuations on a sector-by-sector basis, noting "nosebleed
valuations" for popular companies like Southern Company (SO) and
Verizon (VZ).

Dividend investing is fine, but you must look past
the dividend yield and study the earnings, earnings growth rate, cash
flow, balance sheet, and payout ratio.

Scott Murray astutely observes that the volatility indexes seem out of line with reality. He notes the potential for some sophisticated arbitrage opportunities, but these are not available to the average investor. The most important lesson is his warning about buying volatility because you have read about headline risks. How many times must we repeat that the market has already priced what you read in your morning paper?

If you have been following our regular advice, you have done the following:

Replaced your bond mutual funds with individual bonds;

Sold some calls against your modest dividend stocks to enhance yield to the 10% range; and

Added some octane with a reasonable input of good stocks.

There is nothing more satisfying than collecting good returns in a sideways market.

If you have not done so, it is certainly not too late. We have collected some of our recent recommendations in a new investor resource page -- a starting point for the long-term investor. (Comments welcome!)

Final Thoughts on Jackson Hole

Last week I predicted that the Fed will eventually act, but perhaps with something other than another round of QE. Jon Hilsenrath's take plays this down, and he has good connections. Perhaps I am wrong. I remain open to new information.

I do not expect anything significant from Jackson Hole, so there is potential for a market disappointment. It would not be the first time that I have disagreed with Felix, and the verdict has been mixed!

Here is my rationale:

Jackson Hole is typically not the forum for policy announcements. It is an occasion for mixing and exchanging ideas. Most speeches by the Fed Chair are of the cerebral and background variety.

The 2010 Bernanke speech is a piece of Wall Street truthiness. In fact, there was little immediate market reaction. Stocks were lower a few days later. It was only after a big rally that those seeking a bogus correlation reached back to the "hints" from the Jackson Hole speech. In fact, there was nothing new in these hints, and the official policy did not start until November. When someone is on a mission to prove something, and has a choice of starting dates, it makes it easier to create bogus correlations.

The jury is still out. There is no reason for Bernanke to tip his hand before getting the employment report for August.

I have a dozen links (not included) to stories speculating about this and forcefully explaining what the Fed should do. Most of them confuse personal opinion and politics with forecasting.

For those seeking investment success, the key question is what the Fed will do, not what you think it should do.

August 06, 2012

No one has watched more hours of CNBC over the last twenty years than I have. I am a big fan. Since I also represent an important part of the investment community, my viewpoint might even count for a little more.

If you and I were socializing over coffee or a drink, I could tell you some great CNBC stories, including correspondence with many of the anchors, past and present, from many years ago.

So I write this as a friend of CNBC and with the best intentions.

But I am concerned.

What Went Wrong - - the Facts

CNBC is getting killed on the ratings. There is a death spiral as their appeal shrinks and they respond in a way that makes it worse.

Squawk Box (6-9 a.m.) is supposed to prime traders before the bell. The show posted its lowest rated its time block since Q4 2006.

The Closing Bell (3-5 p.m.) is supposed to wrap up the day’s action. The slot posted its fifth-lowest rating in total viewers and second-lowest ratings in the key 25-54 demographic since 1997.

Fast Money (5-6 p.m.) is focused almost specifically on swing trading stocks. That time slot showed the lowest rating for the 25-54 demo since 1997 — and lowest in total viewers since Fast Money launched in 2006.

This is merely a summary. It is actually even worse. Kudlow is losing to Lou Dobbs, etc. It is across the board. And this is before the boxing replacement for the Olympics.

Simply put, CNBC has little to offer to the average investor. There is too much emphasis on day trading (in content and commercials), and far too many stories about fear.

As someone who watches the news, the blogs, and the major communication channels, I can see the pattern. It creates a climate that actually will kill their audience.

There is news.

A widespread network of observers creates negative talking points. The motivations may include selling gold, selling bonds, selling a political viewpoint, but none of it has much to do with investment returns for the average person.

These points are published on a website that embraces conspiracy and anonymity. Somehow, many people (including those who should know better) think this adds credibility.

Traders avidly consume these viewpoints and send emails and tweets to the CNBC team.

Those reporting from the floors in NY and Chicago repeat these ideas, sometimes almost word-for-word.

The reports constitute valid information but misleading information. They show what short-term traders are thinking, but that may not be very helpful. The problem for investors with a longer time frame is that there is not enough context and perspective. It scares the daylights out of people who depend upon professional journalism to provide balance.

The content of these stories has little to do with long-term investment prospects, but plenty to do with selling page views and ratings!

Examples

CNBC offers some face time to analysts with various opinions. The skepticism is apparent for anyone who even thinks about the bright side. A guest who forecasts a rally of 15-20% is making a "bold call" or suggesting something crazy.

Try this recent appearance of Tony Dwyer, who sees the S&P at 1575 by the end of the year. (CNBC is having trouble with the embedded links again, so you will have to click through to watch).

"In fact Dwyer believes his target is conservative. “15 is the lowest non-recession multiple in a sub-3% core inflation environment. The average multiple is roughly 20 times so I believe we are being overly conservative – even with our new target of 1575,” he says.Looking at the fundamentals, Dwyer sees good things for the US economy.

“We’ve had an historic drop in interest rates as well as a huge drop in energy prices.” That’s good for consumers. And he adds we also have a slow recovery in housing – again bullish."

A guest who merely poses the possibility that earnings meet current expectations and the PE multiple gets to a conservative long-term average of 15, is viewed as crazy. This in spite of the low inflation and interest rates.

While you may not agree with the bullish analysis, it is mainstream thought for many of us, including big-time pension-fund managers. It is not the object of scorn. If the S&P reached 1500 to 1575, as the analysts suggest, could we really be surprised? After all, earnings are much higher now than when this level was reached in 2008.

Today's "Maria hour" included a story asking whether we are currently in a recession. Hardly anyone believes this, but those who trumpet the recession story get on TV. Those refuting this do not get the TV gigs. I am talking about the people that I feature each week: Doug Short, The RecessionAlert team, Bob Dieli, and The Bonddad Blog. How about equal time for them?

Shortly thereafter we had (yet another) interview with Harry Dent about Dow 3000. He was just on a couple of weeks ago! Why couldn't Maria use the time to interview someone with some solid stock ideas for the average investor? She challenged in her questions, but that is not the point. Don't the CNBC producers understand the effect of the repetitive Dow 3000 and "End of Stocks" headlines?

Conclusion

CNBC faced a tipping point several years ago. They lost sight of the fact that most people are investors. They are long the market. That is their natural audience. CNBC hosts do not need to be cheerleaders, but they do need to inform this audience.

Most of the active emails and tweets they get come from traders, many of whom see this as a game between bulls and bears. The coverage reflects this. The CNBC team started saying things like "It is a bad day for those long the market."

CNBC needs to decide whether to compete for the active trader and fear market, getting ever more negative and political, or to get back to their foundation of helping regular investors.

They are not helped by images of a car going off a cliff, or stories about Congress going on vacation. Their viewers need to know what segments of the market are cheap. How to succeed in the face of these threats. How to rebuild retirement.

May 16, 2012

I did not set out to write a trilogy about Europe, but the market is telling us that nothing else matters right now.

My long-standing position is that Europe is engaged in a normal democratic political process with a very large number of contending parties. In such matters it is difficult to predict the exact outcome beyond saying that no one will be completely happy.

My approach is pretty modest in terms of forecasts. I do not know what the exact outcome will be. My current guess includes the following:

The eventual outcome will include a bit less austerity because of recent election results;

European leaders will manage to avoid the very worst outcomes; and

The nature of the political process leads to eleventh-hour solutions, permitting everyone to fear the worst as long as possible.

Nearly everyone else, regardless of credentials, claims a better crystal ball than mine. There is actually a wide range of possible outcomes worthy of review.

Possible Endgame for Europe

Let me rank these from worst to best.

Doomsday! This is the story getting the buzz. There will be a bank run in Greece based upon fear of leaving the EuroZone. This will rapidly spread to other countries. Advocates of this concept point to the sequential attack on banks in 2008 to prove their point.

Nearly every media source has now highlighted this graphic possibility, so it is already familiar to everyone. CNBC now promises to show lines at Greek ATM machines, in the same way they helpfully showed us oil spilling into the Gulf during the time of the BP oil spill.

The slow-moving train wreck. This is the analysis from Nouriel Roubini.

"...there are only four ways to achieve such real depreciation:

First, a sharp weakening of the euro. But this is unlikely as Germany is strong, the U.S. economy is weak and running twin deficits and the ECB is not aggressively easing monetary policy;

Second, a rapid reduction in unit labor costs through structural reforms that increase productivity growth in excess of wages. But this is just as unlikely: It took 10 years for Germany to restore its competitiveness this way; and Greece cannot stay in a depression for a decade, until reforms start to have a real impact;

Third, a rapid deflation in prices and wages, known as an “internal devaluation.” But this would lead to five years of ever-deepening depression, while making public debts more unsustainable as the fall in prices would increase the real value of such debts (the balance-sheet effect of debt deflation);

Fourth, if the first three options are impossible, the only path left for Greece is an EZ exit: A return to a national currency and a sharp depreciation would quickly restore competitiveness, improve the trade balance and rejuvenate economic growth.

The full analysis from Dr. Roubini is available at his website ( subscription required, and where I am a long-time contributor).

The Roubini analysis is very pessimistic for the EuroZone. My only objection is that it is a pure economic approach with little allowance for changes by the leadership. Meanwhile, I find it interesting that Dr. Roubini sees the process as playing out over time. My guess is that most would be astounded to discover that he is personally 70% invested in stocks with a 50-50 split between global and the US. You can see a full CNBC interview here.

The PBS Newshour balanced viewpoint. I understand that some may disagree about balance, but PBS does try to get a strong representative for differing viewpoints. They had a great segment featuring an Athens source I have featured, a prof from the Kennedy School at Harvard, and Fred Bergsten from the Peterson Institute. Here is Bergsten's comment:

"My bet is that they would get back with the program. And despite the abhorrence of the program by the Greek electorate, understandably, their desire to avoid being kicked out of the euro would be even greater. So, it's going to be messy, but I think the outcome, whether driven by bank runs or by a new election, is going to be to force them back into the fold, at least to an important degree, enough that the Europeans can keep lending them money.

Everybody saves face. A growth element will be added to the package. There will be a little modification in the austerity requirements. But it will be basically back to the program as has existed for the last couple years."

Here is the entire video from PBS. I urge readers to watch it -- a nice change of pace from their regular diet of financial news.

The Marshall Plan for Europe. London-based journalist Matthew Lynn offers an intriguing alternative. Germany, recognizing self-interest, decides that the EuroZone breakup is not such a good idea.

Investment Conclusion

Getting great investment returns means going against the flow. If you just followed the market, you would be average. If you try to guess the market, you are usually blundering at the major turning points.

Most investors are looking only at the worst case of the possibilities listed above. Meanwhile, those who focus on fundamentals will be right on Europe, right on the economy, right on earnings, and (eventually) right on stock prices.

May 15, 2012

Here is a surprise for you. European leaders did better than your favorite pundit!

They will also do better in the future.

For the last two weeks the dollar has moved higher versus the Euro and stocks have moved lower -- almost an unbroken string.

The European story fit nicely with trader pre-conceptions about selling in May, following the pattern of the last two (count 'em!) years, and the lack of more QE.

Setting this up was a revival of the disaster scenario -- a 2008-style Lehman like event where banks would topple and the financial system would crumble. Everyone's favorite conspiracy website teed this up by multiple posts predicting a continent-wide bank run. The leading CNBC commentators are bombarded with email and tweets from traders. In the modern age, the tweeters influence the content.

The bank run story has gotten widespread play, with journalists all solemnly agreeing that a Greek exit from the Euro would be a disaster.

The traders and pundits see European leaders as clueless bozos who did not do what they thought was correct, and did not do it in the time frame they thought was right.

Let us put aside that many pundits sought austerity while many others advocated growth. They all agreed that leaders were wrong for ignoring their recommendations.

An Objective View

This is going to be difficult for most people, but try to be objective about the various parties in Europe. Here is the question:

Has delay and bargaining improved things? Let us start by considering it party by party.

Greece. Clearly improved. Negotiated a better deal on debt on round one, and in the bargaining for round 2. The citizens want to stay in the Eurozone and they want less austerity. They may well get both.

France. Much the same story. Some agreement to reforms followed by pushing back from voters.

Germany. Position improved from last year. There were concessions on political sovereignty and commitment to more austerity. Last year it was a cliff-diving scenario.

ECB. Better now. The ECB exacted concessions for austerity and structural reforms before agreeing to more liberal lending. This was much better than caving in a year ago.

IMF. Better now. By bringing together various European parties, the story was improved and the incentive for the rest of the world to participate was enhanced. The IMF has not yet reached the target in raising funds, but it is doing much better than it would have a year ago. Wasn't that when DSK had his problems?

Other Potential Investors. Also better now than a year ago. I am still expecting China and Middle Eastern sovereign wealth funds to join in. Why? Because it is in their self-interest to do so. Europe is China's biggest trading partner. No nation benefits from a European collapse. The terms for involvement are better than a year ago, and the concessions from the various parties are better.

Turning from the particular participants to the collective, are things better or worse?

In the best case, things are much better than a year ago. Banks have more capital. They have lending from the ECB, with the chance to profit on the spread.

In the worst case, things are also much better. The original Greek debt with the threat of CDS payoffs was a major systemic threat a year ago. Those debts were negotiated, and things are a bit different. There are various current paths for Greece. Whether it is an exit from the EZ or another discount on debt, the stakes are lower than a year ago.

Investment Lesson

This is a continuing story of compromise and negotiation. Each party is benefiting from the delay. So far, it has also helped the collective.

Those complaining about "kicking the can" have been wrong. Those criticizing European officials have been wrong. Those predicting disaster have been wrong. Do you see a pattern?

The mainstream media has a fixation for trader/pundits who have all of the answers, even if they did not take Poli Sci 101. They translate everything into how they would do it in their own business --- immediate and decisive action.

No matter that the recommended actions are in complete opposition, depending upon the political predispositions of the pundit.

Investment Conclusion

Markets can and do pursue irrational themes. You can almost guarantee that it will happen each year. When this occurs, the long-term, Warren Buffett style investor should be prepared to step up.

Mr. Buffett uses his own values and treats the market as giving him mis-priced opportunities. This is a concept that some investors understand in theory, but few can implement.

I have been following all of the Europe news closely. I will try to provide a range of useful perspectives in the next installment. At the moment, everything is on sale. I especially like cyclical stocks like Caterpillar that do not even emphasize Europe, technology stocks like Oracle, which has been very resistant to slowdowns, and growth stocks like Apple, which seems to be trading in line with the dollar.